Thursday, August 12, 2010

There's a lot of unfounded talk going around these days about how deflation has killed the Japanese economy, as good friend Don Luskin pointed out to me the other day. This chart shows the year over year growth in Japan's Nationwide CPI. Since Mar. 1993, Japan's price level hasn't budged: inflation has netted out to zero. That's over 17 years of price stability. From the very peak in Japan's inflation, which was in late 1998, Japan has "suffered" an average annual decline (i.e., deflation) in its price level of 0.4%. It's hard to see how this might be the killer deflation scourge that it's made out to be.

And as for "killer," it turns out that Japan's economy hasn't been killed at all. From the end of 1998 through the first quarter of this year—the period during which the Japanese price level fell 0.4% per year on average—Japan's economy expanded by almost 10%, for an average annualized growth rate of 0.8% per year. By comparison, the U.S. economy grew 25%, or 2.0% per year on average over the same period. The U.S. economy sure trumps the Japanese economy, but not if you consider that our population is younger and has grown at a faster rate than Japan's.

From the end of 1998 to June of this year, Japan's labor force actually shrunk by 3.1%, or about 2 million workers. That means that on a per worker basis, Japanese output expanded by about 13%. By comparison, the U.S. labor force grew by 10.8%, or about 15 million workers over the same period. That translates into a 13% expansion per worker, almost exactly the same as in Japan!

Where Japan has really suffered, of course, is in its stock market. The Nikkei 225 peaked at 39,000 at the end of 1989, and today stands at a mere 9,200, for a decline of almost 75%. The S&P 500, in contrast, has risen over 400% during the same period.

16 comments:

It all goes back to the asymmetry of how modern economists and Fed members view inflation vs deflation.

Even the mildest deflation sends the Fed into a money printing frenzy when in reality, deflation is the result of the collapse in fractional reserve money printing activity.

So in essence, it is the counter balance to bad policy and a necessary adjustment. We should send this article straight to Bernanke who has written plenty about how he would reflate the problematic deflationary environment Japan has 'suffered'.

Ground to Houston, we do not have a problem so long as you stop printing money every time the economy sneezed!!!

I fail to see how a 75 percent decline in the stock market is to be admired or imitated (their property market too btw).Verily, 17 years of price stability--the central bankers won.And the stock market and the property market were killed. Massacred. Annihilated. The Japanese economy grew at 0.8 percent a year in this wonderful period of price stability? This is what we want?

Okay, if this is the new good, then sell your stock and property portfolios ASAP. You can buy them back in 20 years for 75 percent off--and still going down, btw.

The Japanese government's debt-gdp ratio is above 200% (the US is at about 80%) and their stock market has declined 75%. Luckily for them, they have a spendthrift people willing to buy Jap Govt bonds yielding 1%/yr on the ten year and so they've avoided becoming insolvent. Lets hope we're as lucky.

Public-I am all for responsible fiscal and monetary policies. I am not for a fetish about stable prices and gold at the cost of real output. The Fed is charting a very dangerous course in its targeting zero inflation--see the Japanese model (now curiously lionized by Scott Grannis, who I assume will come to his senses tomorrow).

The other problem with deflation is out banking sector. It has property loans outstanding, made in nominal dollars. Those properties crater, and our banking system goes flat for a long time.

I am all for gradual correction of our nation's overinvestment in property, rural areas, welfare and the military. But now is not the time to take on new sudden shocks.

On the other hand, just a few years of modest inflation would raise properties back up to the surface, while allowing consumers and the US government to relatively deleverage.

I say "555"-five years of five percent real growth at five percent inflation. That should be the Fed target.

I know suffering and saving and sacrifice are the price for prosperity--but I don't like suffering, saving and sacrifice as the price for a recessionary deflationary spiral. That is nuts.

For you, the good news is that central bankers get orgasmic at the thought of zero inflation. Your views may prevail. The bad news is that sooner of later Bernanke is going to figure out the high cost of the zero inflation goal.

I suppose I should have made my points clearer in this post. For one, don't believe everything you see and hear, especially with regards to Japan and deflation and its supposedly "lost decade," because much of it is based on erroneous assumptions and facts. Two, Japan's real problem was its stock market, and a tiny bit of deflation is not a satisfying explanation for that. I suspect that Japan's problems lie more in the area of fiscal policy rather than monetary policy. Three, one big reason the economy has "lagged" is that Japan's population is no longer growing and its workforce is shrinking. This is a new demographic dynamic that we have never seen before, and it appears to have snuck in under everyone's radar.

It may be that Japan is an outstanding example that a tight money policy, and a zero inflation target, don't work.The ultimate reasons may have to do with wage stickiness, and depression of investor optimism.Who would buy property in a deflationary environment? The reason to buy property is that the price may go up--and such optimism is strengthened if there is some mild inflation. Stocks somewhat trade on multiples, and multiples go up in time with inflation.In short, mild inflation voids wage stickiness and aids investor optimism. Also helps deleverage our economy, which seems perpetually given to overleveraging.

Japan's 75 percent two-decade decline in stocks and properties, and an economy growing at 0.8 percent a year....that is the result of a fetish for zero inflation.

I know Grannis is right in that Japan has a shrinking workforce, but they have disciplined workers, and excellent education--they should have been able to do a lot better than they have.

Their central bank (and a curious fiscal policy) has starved the country to death.

See value of yen vs. dollar and gold. It has appreciated.

Be careful of those who tell brave tales of tight money and a strong dollar, and no inflation.....it could lead to two lost decades in the USA also.

Benjamin: I don't think you understand the implications of the data on Japan's GDP. Output per worker has risen in Japan almost by the same amount it has in the U.S. Japan's "lost decade" is a myth, the result of misinterpreting the data.

Japan's putput per hour has done fine. See http://www.bls.gov/news.release/prod4.nr0.htmI agree with you on that.

They have a great culture, terrific education system, they are a business-oriented country. All great.

They should have done so much better than they have, and a 75 percent plummet in stocks and property values is a curse.

I concur that an odd fiscal policy did not help (although they largely borrowed the money from themselves).

But I think that tight money must bear huge blame--and you know money has been tight if you compare the yen to gold (it has appreciated against gold), or its exchange rate (way up).

When you have deflation, golds get cheaper every year, interest rates are at zero, and the economy sputters, my guess is that money is way too tight.

All I am saying is beware of the tight money Peter Pan-Pied Pipers.

They will suck vitality out of an economy, wreck your investments.

In a perfect world, maybe zero inflation works. In a perfect world, we would not finance a parasitic military.

But the world is a bit dirty. How dirty is a judgement call.

Right now, I think think an aggressive, expansionist Fed is what we need. And the Fed needs to make clear it has declared war on inflation, just as in a previous era (Volcker), it declared war on inflation.

This war will be a lot more fun to win!!!

And remember, public institutions forever fight the last war. The Fed is fighting the last war.

1. Many (particularly those shorting Yen) chime away about 200% Govt debt-to-GDP which is disingenuous. This number is GROSS debt, whereas official NET debt is closer to 100% - still above US & Core Eurozone, but below the worst of the periphery. Moreover, net debt across Govt + private sector is yet further decidedly more moderate. In effect, the Japanese State has already (mis)spent a substantial amount of private sector savings, but have yet to appropriate it from The People. The NET figure is of course relevant and accurate only if one takes their US Bond holdings as reasonable and stable savings.

2. It is my opinion that the primary cause of the deep falls and subsequent moribund share and real estate markets was NOT subsequent government policy (despite the those who find it ideologically convenient to see it so), irrespective of how poor or misguided such policies might have been. Rather the deep and sustained falls were the product of sustained and exponential rises in the 80s which (like the US) saw investors extrapolate the unextrapolatable deep into the future. This is not a defense of govt policy but an indictment of those who fail to recognize the folly of their point of comparison. The US is already 11 years and a 35 to 50 percent below Peak Optimism - not because of policy but because Peak Optimism was so obviously absurd. It is also worth wondering what those numbers would look like should US shares ever trade at P/Bs and P/CFs anywhere near Japan. Hint: Not much different than Japans -75%.

3. I have also argued Scott's clarified point: that the lost decade was not THAT lost (despite the rhetoric to the contrary). It is dastardly difficult to accurately weigh the true cost vs benefit of their chosen path. In light of peer G7 fiscal positions, and approaching demographic changes, I am sympathetic to the view that Japan is a rehearsal for what we will be facing. And they have merely delayed the inevitable. It woud be fascinating to see the toteboard on the PV diff between taking the pain and delaying it for two and a half decades before taking it.

4. Given the pedestrian growth, one can only surmise what it (and its cascade effects) might have been without the persistent and large fiscal yawn, and the quantitative easing. QEs main effect were surely of little consequence domestically, as they were primarily upon the exchange rate without which the trough would have been deeper, and more prolonged.

5. Far from being an anathema, the appreciation in the yen has been of great value to Japan (whether they know it or not) and has continually forced corporations to become leaner, and far more more efficient from a process and energy intensity point of view. This remains invaluable. One wonders how much pain the chinese can and will internalize, and how long they will run enterprises at operating loss when the FX-vise comes their way.

1. Many (particularly those shorting Yen) chime away about 200% Govt debt-to-GDP which is disingenuous. This number is GROSS debt, whereas official NET debt is closer to 100% - still above US & Core Eurozone, but below the worst of the periphery. Moreover, net debt across Govt + private sector is yet further decidedly more moderate. In effect, the Japanese State has already (mis)spent a substantial amount of private sector savings, but have yet to appropriate it from The People. The NET figure is of course relevant and accurate only if one takes their US Bond holdings as reasonable and stable savings.

2. It is my opinion that the primary cause of the deep falls and subsequent moribund share and real estate markets was NOT subsequent government policy (despite the those who find it ideologically convenient to see it so), irrespective of how poor or misguided such policies might have been. Rather the deep and sustained falls were the product of sustained and exponential rises in the 80s which (like the US) saw investors extrapolate the unextrapolatable deep into the future. This is not a defense of govt policy but an indictment of those who fail to recognize the folly of their point of comparison. The US is already 11 years and a 35 to 50 percent below Peak Optimism - not because of policy but because Peak Optimism was so obviously absurd. It is also worth wondering what those numbers would look like should US shares ever trade at P/Bs and P/CFs anywhere near Japan. Hint: Not much different than Japans -75%.

3. I have also argued Scott's clarified point: that the lost decade was not THAT lost (despite the rhetoric to the contrary). It is dastardly difficult to accurately weigh the true cost vs benefit of their chosen path. In light of peer G7 fiscal positions, and approaching demographic changes, I am sympathetic to the view that Japan is a rehearsal for what we will be facing. And they have merely delayed the inevitable. It woud be fascinating to see the toteboard on the PV diff between taking the pain and delaying it for two and a half decades before taking it.

4. Given the pedestrian growth, one can only surmise what it (and its cascade effects) might have been without the persistent and large fiscal yawn, and the quantitative easing. QEs main effect were surely of little consequence domestically, as they were primarily upon the exchange rate without which the trough would have been deeper, and more prolonged.

5. Far from being an anathema, the appreciation in the yen has been of great value to Japan (whether they know it or not) and has continually forced corporations to become leaner, and far more more efficient from a process and energy intensity point of view. This remains invaluable. One wonders how much pain the chinese can and will internalize, and how long they will run enterprises at operating loss when the FX-vise comes their way.